Faster payments are quickly becoming a priority for banks across the country to support a variety of use cases for their customers. Although the drive for faster payments started many years ago with the publication of Strategies for Improving the U.S. Payment System by the Federal Reserve, the Covid-19 pandemic has accelerated many community banks’ plans to implement faster payment solutions. With many businesses and customers now unable or unwilling to process manual payments, such as cash and checks, due to concerns about the virus, a new generation of instant and contactless options can deliver safe, secure, and efficient payments.
Faster payments bring the promise of greater speed and control for consumers and businesses. The faster credit-push model and the use of requests for payments put recipients in much greater control of the funds in their bank account. This benefit cannot be understated because it marks a vast improvement for consumers and businesses that paid by check, only to be left wondering when the check would be cashed.
New faster payment systems are also designed from the ground up to be smarter, with enhanced risk management systems considered and built from the very beginning. Rules and system controls, such as the ability of banks to set transaction limits, will help banks safeguard users and serve as a check against any would-be bad actors.
However, there are many other ways in which faster payments will make a positive impact. There is a growing interest by companies to have the ability to pay people immediately after a job is completed, such as a contractor finishing a project or ride-share driver seeking payment at the end of the day. With faster payments, companies will be able to instantly send payment in those cases, which will improve cash management for companies and satisfy recipient expectations.
The market for faster payments is small but is rapidly growing as more community banks partner with technology providers to access a range of solutions. Faster payment options include, but are not limited to, the following products and systems:
Nacha recently reported a surge in the use of Same Day ACH in 2020—transaction volume and value increased 38.6 percent and 86.1 percent, respectively, to reach new heights of 347.2 million transactions totaling $460.1 billion.
Same Day ACH is the most readily available faster payment solution for community banks because it reaches all financial institutions in the country. Many community banks already offer traditional ACH payment services, such as direct deposit for the payroll of local businesses, so Same Day ACH is an enhancement that is familiar to bank employees and customers.
As more community banks develop and implement comprehensive payment strategies, Same Day ACH is poised to play a vital role in delivering faster, cost-effective payments.
Beyond Same Day ACH, new solutions like The Clearing House’s RTP Network and push-to-card products from the major card network operators also extend faster capabilities to community banks.
Launched in November 2017, the RTP Network now reaches nearly 100 financial institutions and approximately 56 percent of all U.S. DDAs. The RTP Network is the first domestic payment system created since the ACH Network in the 1970s, and it brings many enhancements to improve the payment process for consumers and businesses.
RTP Network features, such as real-time clearing and settlement and Request for Payment, deliver a faster payment experience for community banks and allow business customers to send Request for Payment messages to other businesses or consumers. The use of Request for Payment in B2B scenarios can allow, for example, a company to pay on the spot after the delivery of a shipment. Other companies, like utilities, imagine using the Request for Payment to send monthly bills to customers.
The card networks, notably Mastercard and Visa, are also enabling new capabilities through their Mastercard Send and Visa Direct programs. These solutions utilize the card network infrastructure to allow credit payments to be “pushed” to debit cards.
In a recent report published by the U.S. Faster Payments Council, Mastercard Send said it allows for “secure, near real-time transfers to and from billions of card, bank and digital accounts.” Visa disclosed in its 2020 Annual Report that Visa Direct “enabled faster payouts to over 2.35 million U.S. small businesses and sellers.” Visa also reported that Visa Direct expanded to 3.5 billion transactions globally.
The campaign for ubiquitous faster payments, however, is not finished. ICBA strongly urges the Federal Reserve to assist in achieving ubiquitous, nationwide access to safe and efficient faster payments for all financial institutions and their customers by serving two roles:
Financial institutions will soon gain access to a new option: FedNow, a new instant payment service developed by the Federal Reserve. In February 2021, the Federal Reserve committed to bringing this new service online in 2023.
With FedNow, all community banks will gain access to a new payment system with instant clearing and settlement and requests for payment. These new features will offer community banks and their customers safe, secure, and efficient real-time payments for a variety of use cases. Moreover, FedNow will serve as a platform for innovation for years to come.
ICBA supports the Federal Reserve System in its dual role as payment systems regulator and provider/operator of services. It also:
The push for faster payments is about much more than simply enabling consumers and businesses to enjoy instant funds transfers—it is also an effort to provide richer payment-related data in real time.
Payment-related data, such as details about invoices, can furnish businesses with greater insights that contextualize payments. The adoption of ISO 20022 will help more businesses develop straight-through processing and realize time and cost savings with their payment processing.
ICBA supports the development and evolution of broadly inclusive, safe, highly secure, and efficient faster payments systems that enable risk mitigation and help community banks remain competitive and meet the payments needs of their customers. ICBA encourages its members to focus on their readiness efforts in 2022 to prepare for the launch of FedNow in 2023.
ICBA applauds the development of ubiquitous payments settlement networks – developed by both the public and private sector – that are available to all federally insured financial institutions.
ICBA strongly urges the Federal Reserve to continue their phased approach to expeditiously launch the FedNow Service which would allow community banks choice in selecting real-time network providers.
ICBA strongly supports and encourages community bank adoption of faster payments and urges all community banks to develop strategic approaches to offering faster payments products and services to their customers.
ICBA urges the Federal Reserve to implement a fair, equitable pricing model that recognizes the investment required to add instant payments capabilities, ensuring that even the smallest community banks have a level playing field for competing with the largest institutions.
ICBA also recognizes that core processors play a critical role in ensuring community bank readiness and encourages banks to work with their processors and technology partners to prepare for FedNow’s launch.
ICBA encourages the U.S. Treasury Department to utilize faster payment methods to deliver government payments to citizens’ bank accounts.
ICBA urges both the Federal Reserve and The Clearing House to make achieving interoperability in their real-time payments systems a priority to ensure ubiquitous adoption.
ICBA urges policymakers to continue to assess and review the impact of faster payments on the current legal and regulatory framework.
ICBA maintains that the continuing adjustment of cutoff times for Fedwire and the National Settlement Service, along with the extension of the discount window to accommodate evening, weekends, and holidays, is a vital step toward payments improvement and should be a priority for the Federal Reserve.
Development of an Instant Payments System
The addition of an instant payments system by the Federal Reserve for the settlement of faster payments complements present-day clearing and settlement systems by providing immediate funds settlement transaction-by-transaction on a 24x7x365 basis. Such a platform serves as a foundation for innovation, not just for payments today but as payments evolve in the future.
By developing and operating an instant payments service, the Federal Reserve:
ICBA recognizes that 2022 will be a pivotal year as the industry prepares for the launch of FedNow and urges all community banks to develop and implement strategic plans to provide faster payments products and services to meet customer needs.
Competition and Innovation
The implementation and ubiquitous adoption of instant payment systems will strengthen the US economy by providing a platform for continued innovation and economic growth. Some policymakers are concerned that other countries may gain a competitive advantage if the US payment system does not evolve quickly enough.
ICBA recognizes that instant payments can play a vital role in sustaining economic growth and ensuring that American businesses and consumers can access payments products and services that meet the needs of the 21st century economy. ICBA urges community banks to prioritize preparations for the launch of FedNow in 2023.
Expedite Government Payments
National emergencies and natural disasters have highlighted a growing need for the federal government to have the ability to distribute recovery funds and stimulus payments quickly and efficiently to citizens’ accounts. The 2021 American Rescue Plan Act directed the Internal Revenue Service and the Bureau of Fiscal Services to deliver nearly $400 billion in Economic Impact Payments to help Americans recover from the pandemic; nearly 90 percent of these payments were deposited directly into accounts via the ACH Network.
ICBA encourages the federal government to continue to utilize faster payment methods, such as Same Day ACH, to reduce inefficiencies associated with issuing checks and promote the benefits of electronic payments and bank accounts.
Ubiquitous adoption among financial institutions should be the primary measure of success for achieving payments modernization in the U.S. The establishment of FedNow provides choice for every community bank that desires to implement a real time settlement solution. Achieving industry-wide ubiquity will require all community banks to prioritize implementation of a real-time settlement solution.
As community banks prepare for the launch of FedNow, they recognize the urgency to adopt an instant payments solution and develop plans to successfully deliver new products and services. Policymakers should support community banks as they prioritize instant payments by eliminating undue regulatory burdens that may impede adoption.
Both the public and private sector providers should aim for interoperability at the earliest possible date, but the Federal Reserve should not delay launching FedNow as the path to interoperability is discussed and charted.
Impact of Existing Legal Framework
The attributes of real-time payments potentially impact consumer protection and risk mitigation strategies. Many of the protections included in the existing legal and regulatory framework need to be revisited to accommodate new payments settlement networks such as FedNow, RTP, or card-based solutions.
Liquidity Management Tools
The Federal Reserve should continue its efforts to provide tools and templates to support the impact of the 24-hour business day and accounting changes. A key aspect for financial institutions to manage and maintain the right cash position and liquidity is detailed electronic transaction reporting to facilitate reconciliation and address potential risks arising from the new 24x7x365 transaction processing environment.
Crucially, bankers’ banks play a vital role in aiding community banks with liquidity management. The ability of participants in the FedNow Service and their agents to access and manage funding during the end-of-day cycle and provisional timeframes period (i.e., after-hours, weekends, and holidays) will be important in avoiding overdrafts of a bank’s master account at the Federal Reserve. Lack of controls to moderate the velocity of payment flows over their master accounts and offer greater certainty about their balances could pose payment system risk with downstream implications.
Fair and Equitable Pricing
Emerging changes in the payments landscape are disintermediating banks and threatening the important revenues community banks derive from payment cards. Payment card revenue is used to fund capital accounts which support community lending. In an environment of compressed community bank non-interest revenues, it is important to implement a fair, equitable pricing model for FedNow.
ICBA advises the Federal Reserve to consider short-term monetary incentives such as fee reductions for early adopters to help offset early investments. ICBA also encourages the Federal Reserve to routinely review and update pricing to ensure that community bank participants remain competitive in offering payments services to their customers.
Staff Contacts: Brian Laverdure, Deborah Matthews Phillips, and Rhonda Thomas-Whitley